Beware The Real Estate Boom

It's April 2012. Realtors are telling me that multiple offers are again getting to be the rule rather than the exception.

This week, three different realtors told me about three different situations for a condo, single-family home and a 4-Plex where there were 4, 5 and 8 offers respectively. A recent post by a Calgary realtor on Facebook described being 10th in a line of multiple offers.  This property went for $15,000 over list!! This harkens back to the manic days of 2006-2007.

If a new boom has arrived, and if you are going to stay in the game, here are two major, serious issues to watch out for.

Number one. Conditional offers subject to financing are producing financing appraisals that do not support the purchase price.

Number two. The time for conducting diligence, removing diligence conditions and time to close the deal are all being compressed.

Today, let's talk about number one - financing appraisals that do not support the purchase price. In a hot market, emotional frenzy causes overbidding. Here's a classic comment, "OMG, if I don't buy now I'll never be able to afford it".

Completely wrong, of course, but very common in a boom market. Along with overbidding for property, buyers are pressured to write unconditional offers. That's right, excited buyers write offers that are not "subject to financing". Then, when the buyer goes go to their bank, the bank orders an appraisal. The current lending climate is making appraisers very conservative.

If the buyer bid $350,000 with 20% down, the cash portion is $70,000. If the bank appraisal says the property is worth $320,000 then the bank will only finance 80% of $320,000 which means a mortgage of $256,000. That makes the cash in not $70,000 but $94,000. The buyer needs to come up with an extra $24,000 or they cannot purchase the property. Great if they have the extra money.

For a great discussion of this topic, see Garry Marr’s Financial Post article that I found in the business section of the Edmonton Journal. There is one thing Garry doesn’t talk about, and it’s huge exposure.  If a buyer walks from the deal they may lose their deposit and are exposed to further loss if the seller can't sell to a new buyer for $350,000. Enough said, you get the idea.

In future blogs I will discuss timing for diligence, condition removal and closing.

Squatter's Rights in Alberta

We've all heard this expression, and we kind of understand it. Someone occupies or 'squats' on someone else's property and somehow, in some way, in some amount of time, the ‘squatter’ obtains some kind of legal rights.

But, that's an ancient law, right? It probably doesn't apply anymore, one of those legal myths.

Wrong!

Squatter’s rights, otherwise known to lawyers as 'Adverse Possession' is alive and well in Alberta. BIG NOTE: Adverse Possession laws very widely across Canada from province to province.

The legal rules surrounding Adverse Possession are actually quite well-known and easily provable in many circumstances. Our Neil Fenna here at Ritchie Mill Law Office has just won an amazing victory in an Adverse Possession court battle.

Our client owns and operates a fenced storage yard. The neighbour is an oilfield services company. The fence surrounding our client’s storage yard enclosed a strip of the neighbour's property 5 m wide and 80 m long. After a long and hotly contested trial, the court decided that the neighbor had not met the requirements for retaining ownership of that 5 m x 80 m strip of land.

The court declared that our client is now the lawful owner and ordered the Land Titles Office to amend the titles accordingly.  400 m² is just over 4300 sq.ft.; that's a good chunk of land even on an industrial lot. It’s a fascinating case and a pretty easy read. The court judgment is public information, you can read it here.

So, if someone is on your land or you are on their land, either way, DON'T IGNORE IT. Legal ownership may be disappearing or being created, you need to know!

PS: I'm skating for Alzheimer's. My 95 year old Dad has Alzheimer's and it's pretty grim. So I'm doing my bit by participating in the Scotia Bank Gordie and Colleen Howe Alzheimer Hockey Tournament. Please click here to support me and make a donation
<http://bit.ly/Az06Mt>.
Barry

My Mortgage Is In Trouble - What's Next?

The 2007 collapse of Alberta's real estate boom caught a lot of home buyers by surprise. There hadn't been a major collapse in the real estate market since 1980 then triggered by the still hated National Energy Program. Many homebuyers, both owner occupiers and investors had little experience in 2007/08 when prices came crashing down. Now in 2012, we are still experiencing 'crash backlash'.

We get a lot of questions about mortgage default. How long does it take the bank to foreclose? What if the mortgage is now worth more than the property? Can I use a Quit Claim to get rid of the property?  A very good client suggested, and I agreed, that it would be worthwhile to discuss some of these issues a little bit more. Following are a series of questions from my client and answers by me.

CLIENT: Enlighten me. What happens if someone defaults on a mortgage in Alberta on a single family home?

BARRY: Once a borrower misses one mortgage payment they are, as the bank and the mortgage refer to it, "in default". Most likely no later than two missed payments, the bank's collections department makes a call. They want to know when the borrower is going make those outstanding payments. There will probably be follow-up calls until payments are brought into good standing. If payments are not brought up to date, then the bank sends the file off to their foreclosure lawyer. The foreclosure lawyer writes what is called a, 'Demand Letter' This, 'Demand Letter' says how much is outstanding on the mortgage, what the daily rate of interest is, what the legal fees are up to date and threatens formal legal action if everything isn't cleared up by a certain date .  If the borrower is unable to make the payments and bring the mortgage into good standing, then the next step is for the foreclosure lawyer to start formal foreclosure proceedings. This is done by way of a legal document known as a 'Statement of Claim'. The Statement of Claim is prepared by the foreclosure lawyer, filed at the courthouse, served on the borrower and now the foreclosure process has officially started.

CLIENT: The bank forecloses, presumably? How long does this process take from the last time a payment was made?

BARRY: Depends on the lender. It is not uncommon for the bank to let at least 2-3 payments go before their collections department calls borrower. Then perhaps another missed payment or two before they send on to their lawyer who writes that 'Demand Letter' followed by foreclosure proceedings. At the first court appearance 2-6 months after the first missed payment, any decent amount of equity in the property will get an owner occupier six more months to bring the property into good standing. Investors are treated more rigorously. In summary, my estimate is that for an owner occupier with equity it is 8-12 months until the foreclosure is completed. For an investor or an owner occupier with little or negative equity it is 3-9 months. Timing depends a lot on how aggressively the lender pursues the foreclosure.

CLIENT: What happens if there is a gap, say $50,000, between the house value once sold (by court order) and the mortgage plus accrued interest plus as I understand it, insurance, inspection and appraisal fees, management fees and those exorbitant foreclosure lawyer legal fees ? Is the home owner on the hook?

BARRY: For an individual, if the loan is  a conventional mortgage ( a mortgage not insured under the National Housing Act ( NHA) and typically where the borrowed amount is less than 80% of the purchase price) then whether it's owner occupied or for investment purposes, the bank's security is limited to the property. If the bank forecloses, sells the property (say $$300,000) and doesn't get enough to pay off the mortgage, (say $350,000) tough luck for the bank. They can't chase the borrower's other assets for what's called the deficiency (in this case, $50,000).

A conventional mortgage granted by a corporation does not have the same protection. The corporation is responsible for the deficiency which is $50,000 according to our example above.

If it's an NHA insured mortgage (usually CMHC or a private insurer like Genworth) then the borrower is responsible for the deficiency. All the borrowers’ assets are at risk. For NHA mortgages the lender is responsible for the foreclosure action. If the borrowers does not pay up the arrears then the lender either sells the property at a loss or if they can't or don't want to sell, uses what's called a Rice Order to put the property in their own name (and perhaps later into the insurer's name) at a court approved value. Losses are quantified by a court judgment and are then sent on to the NHA insurer and referred to as Deficiency Judgments. CMHC is by far the biggest NHA insurer and their policy seems to be that they file the Deficiency Judgment but do not actively pursue try and collect it. Apparently they wait for the borrower to want to buy more things on credit at which time the Deficiency Judgment pops up and makes the borrower deal with the judgment if they want to borrow more money. Remember I said policy and policies change.

CLIENT: Is there a court record?

BARRY: Yes, foreclosures start with a court action so there is a court record searchable by name of the defendant.

CLIENT: Will she/he be able to buy a new home, in AB or elsewhere with a mortgage or will it be hard or impossible to get a new mortgage? Will she/he get a bad credit rating if not paid?

BARRY: I believe it's more difficult to get a new mortgage and that credit ratings are affected. However I don't know the exact details and this information would be better obtained from a lender or mortgage broker.

CLIENT: What is different in Alberta vs., say Ontario in this instance?

BARRY: Alberta is the only province where, for a conventional mortgage, the bank's security is limited to the property. If the lender forecloses on the property, sells it and doesn't get enough to pay out there mortgage, they can't chase the borrower's other assets for the 'Deficiency' (see above). This is definitely part of the 'Alberta Advantage'.

BARRY:  For other discussions on Quit Claims scroll down here. Foreclosures are complicated and tricky. for a much more detailed discussion of the above points and other important foreclosure topics and issues click here. If anyone needs to have a private chat about foreclosures and how they affect you, contact me through this website or e-mail me.

New RRSP Rules

Well, there's been lots of comment since my Sunday February 12th, 2012 post regarding Jamie Golombek’s column in the National Post. My last kick at the cat is as follows:

1.  It's new for the CRA to recognize that interest is deductible in the circumstances as set out in the Golombek column.

2.  Self-directed non-arm's-length mortgages to yourself seem always to be discussed by banks and trust companies in the context of buying a personal residence. That is how I have always thought of them.  The Golombek column confirms you can lend to yourself for investment purposes as long as you follow the usual non-arm's-length lending rules.

3. Being aware of #1 and #2 is just another tool in your toolbox. If you know about the possibilities, you can analyze whether you personally have any circumstances where this strategy might work . No particular strategy fits for everyone.  This strategy may only work for a small number of people. But, if you don't know about it, you can't use it.

4.  CAUTIONARY NOTE: self-directed RRSP mortgages, whether arm's-length or non-arm's-length are tricky and time-consuming. Why? My experience is that when you have a lender (the RRSP holder) who has no experience in lending, a borrower who has no experience in setting up a loan because they usually have a mortgage broker helping him and a Trustee (Olympia Trust or Canadian Western Trust or…) who really only want to do their jobs as trustee and not give much assistance to either the RRSP holder or the borrower and who change their policies without telling anybody, then, these mortgages are tricky and time-consuming.
Having said that, I have one client borrower who organizes all of the RRSP paperwork and requirements themselves with barely any assistance from lawyers. It makes me nervous but they are getting it done.

5.  In my previous post I talked about replacing an existing investment mortgage on one of your properties with a mortgage from your RRSP. Some comments from readers were that you need to have a lot of money in your RRSP to replace almost any mortgage, the National Housing Act (CMHC ) requirements are onerous and some comments were unsympathetic to holders of a self-directed RRSP containing underperforming assets such as expensive mutual funds . All valid comments, and they serve to show and illustrate that there are a great variety of personal circumstances.  As we said above, this strategy isn't for everyone but it could fit in certain circumstances.

6.  One other useful circumstance that comes to mind comes from the crash in real estate prices that commenced in 2007. Some of my clients who bought property pre 2007 and had mortgages coming due after the crash got their usual mortgage renewal notice in the mail from their lender as their current mortgage term was expiring. Except, OOPS, it wasn't a renewal notice, it was a notice that the lender was calling the loan and exiting the mortgage business!  Exceed Mortgage comes to mind as one lender who did this. If you couldn't get new financing from a replacement lender, maybe your self-directed RRSP could help.

7. And, lastly, using RRSP money in any way, for any reason, takes time to figure out, learn and get comfortable with. It's no different than any other real estate strategy that any of us employ. All strategies take time to learn, usually through multiple deals employing the same strategy. Some strategies are relatively simple, such as buying a single-family home with a conventional 80% loan-to-value mortgage. You might get pretty good at employing this strategy after only 2-3 deals.
On the other hand, lease-options or rent-to-own as they are often referred, is a more complicated strategy. It takes a lot more time just to get comfortable with the details of rent to own even before implementing. Then, my view is that it takes 1-2 years to complete at least 5-6 deals, that actually close with your tenant buyer completing their purchase, before you could say you are  familiar and comfortable with the rent to own strategy.

RRSP mortgages are on the more complicated side. It's all about education and really understanding how we invest, no matter what strategy we use.